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The impact of the Budget on low income households

The Chancellor’s annual budget statement contained a number of measures, many of which would affect the living standards of those on the lowest incomes. The key announcements contained in the Budget Report 2012 are as follows:

Tax changes

The personal allowance for Income Tax will increase by £1,100 in 2013/14, with some of this increase passed on to higher rate tax payers. The higher personal allowances for those over 65 are to be frozen and then phased out. The top rate of income tax is to be cut to 45p from 2013/14 and some tax loopholes closed. Analysis of the budget (by the IFS and Resolution Foundation – see below) shows that maintaining tax credit levels is more effective at helping those on lowest incomes than raising the tax threshold.

Child Benefit

The Chancellor had previously announced that Child Benefit would be removed from all families containing a higher rate tax payer, that is, earning above £42,475. Today he announced that only families where one earner receives above £50,000 would lose Child Benefit, with the amount received reduced by 1 per cent for every £100 earned over that limit, meaning that only families with an earner receiving £60,000 or over will lose it altogether. No plans were announced to reverse the freeze in the level of Child Benefit that will apply until 2013/14.

Welfare spending

The Chancellor signalled possible future cuts in welfare spending of some £10 billion by 2016.

Child poverty

The only reference to Child Poverty in the Budget is at page 90 of the Budget Report:

The Social Mobility and Child Poverty Commission will assess the Government’s progress in reducing child poverty and improving life chances against a set of measures.

Impact on household incomes

The cumulative impact of the budget measures on household incomes shows households lower down in the income distribution in general losing larger proportions of their income, although families in the top income decile see the largest losses (see Charts B1, B2, B3 and B4, pages 91 to 93, of the Budget 2012). The households that lose least are those in deciles 6, 7 and 8. Certain measures are excluded from this analysis, including caps in the amount of income tax relief available, and the reduction of the top rate of income tax from 50 to 45 per cent.

Independent assessments of the Budget Report

As background to the Budget, the Institute for Fiscal Studies (IFS) published a summary of recent analyses looking at the likely trends in household incomes over the next few years and, in particular, how they are likely to be affected by tax and benefit changes that are currently planned for 2012/13 (see IFS Briefing Note BN126). This found that households with children will lose most from tax and benefit changes in the coming year (see IFS press release).

the common assertion that increasing the personal allowance is progressive is true if one considers the gains across individual income taxpayers. It is not true if one considers the gains across all families as relatively few of the poorest families contain a taxpayer and two-earner couples gain twice as much in cash terms as one-earner families.

The IFS post-budget impact analysis can be found on the IFS website. The IFS finds that the overall impact of all measures introduced by the Coalition is broadly regressive, but when the full impact of Universal Credit is included, the winners and losers are more evenly distributed across the income spectrum.

The Women’s Budget Group has analysed the impact of the budget on women (see Women 'hit worst' by austerity mesures). Their analysis concludes that the budget will undermine gender equality in the UK. Their report points out that the above inflation increases in the personal tax allowance does not help those with no earnings or those whose earnings are below the threshold. The report emphasises that the budget must be seen in the context of an increasing squeeze on public spending, cuts in public sector services; loss of public sector jobs; and the public sector pay freeze and the prospect of further falls in public sector pay in the poorest regions. See: the Women’s Budget Group website.

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PSE:UK is a major collaboration between the University of Bristol, Heriot-Watt University, The Open University, Queen's University Belfast, University of Glasgow and the University of York working with the National Centre for Social Research and the Northern Ireland Statistics and Research Agency. ESRC Grant RES-060-25-0052.